Using 120 observations of quarterly data for a mining firm from 1985(1) to 2014(4), the following equation is obtained by ordinary least squares. loĝQ t = 0.72 + 0.52 log K+ + 0.47 log Lt (0.65) (0.17) (0.09) Where Q is coal output; K is capital input (in thousands); L is labour input (measured by the number of people employed). The values in brackets are p-values. Also, you are given the following test statistics: RR(1, 116) = 12.44 BG (4)=17.26 JB(2) = 15.43 Where RR is the Ramsey Regression Equation Specification Error test statistic; BG is the Breusch-Godfrey test statistic for serial correlation; and JB is the Jarque-Bera Lagrange multiplier test statistic for normality. Note: For a sample size of 120 and 2 regressors, the critical values of the test statistics above at 5% are as follows: RR: 3.94; BG(4): 9.488; and JB(2): 5.99 a. Does this equation provide a satisfactory explanation of coal production for this firm? Why? (10 Marks) b. How do you address the issues highlighted by the three diagnostic tests above? (10 Marks)
